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IRA Gift

I want to start gifting money from my IRA accounts to family members. What do I need to know?

I want to start giving money from my IRA accounts as gifts to my family members. I know I can give up to $13,000 a year without tax penalty. Should I do this through a lawyer or just through my financial advisor?

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Bill's Answer
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Highlights

  • A person can gift another person $13,000 per year tax-free.
  • Through gift-splitting, a married couple can give another couple $52,000 per year tax-free.

I see two issues here for you. Let me tackle the easy one first.

Gifts & Taxes

In general, a person can gift another person $13,000 per year tax-free. However, through gift-splitting, a married couple can give another couple $52,000 per year tax-free. Also, if the gifting occurs over a series of years, the amount can be substantially more. See the IRS documents and in particular for more details.

The more tricky issue is the IRA account

IRAs, Generally

A individual retirement arrangement (IRA) is a personal savings plan that allows a person to set aside money for retirement either by deferring income tax or avoiding . Several types of IRAs exist, which makes it difficult to express accurate generalizations about IRAs and gifting.

In a traditional IRA, taxable compensation placed into an IRA account are deducted from the taxpayer's taxable income. Earnings generally are not taxed until distributed to the account holder. A traditional IRA is a tax deferral account (in other words, a pre-tax account) because the IRA account owner is taxed at their current rate at the time of the distribution, and not when the funds were placed in the account. The presumption is that the account holder will be retired when the distribution occurs, and will be paying a lower tax rate than when employed. Contributions to a traditional IRA are reported on an income tax return, as are distributions.

A Roth IRA is not funded with pre-tax money. A Roth IRA account holder does not report Roth contributions on their tax return. The gains on a Roth IRA are not taxable, and if the account owner is older than 59½, the distributions are not taxable.

A Savings Incentive Match PLan for Employees (SIMPLE) IRA or 401(k) is a retirement plan that some small employers can set up for the benefit of their employees. The heart of SIMPLE plan is voluntary salary reduction. Contributions under a salary reduction agreement are made on your behalf by your employer. Your employer must also make matching contributions. Distribution rules for a SIMPLE IRA are essentially the same as traditional IRAs, and are fully taxable as ordinary income.

Gifting From an IRA

It is possible to make a non-taxable gift from an IRA to a qualified charity. However, to make a gift to a family member, an IRA account holder must take a distribution from the IRA. If the IRA is traditional or SIMPLE, he or she will receive a 1099-R, and must include this distribution on their tax return. As mentioned earlier, gifts up to $13,000 need not be reported by either the giver or receiver of the gift.

You asked about working with a financial advisor or lawyer. Based on the scant information provided, it is impossible for me to state for certain that you do not need the help of a lawyer to make the gift you suggest. If your tax situation is complex, or if you wish the gift to be the corpus of a trust, then by all means consult with a lawyer who has experience in wills, trusts, and estate planning. If your needs are simple and no trust is involved, then a lawyer is not necessary.

I hope that the information I provided helps you Find. Learn. Save.

Best,

Bill

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